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Doing Business in Africa: Angola

Doing Business in Africa: Angola

In the third installment of AFKInsider’s Doing Business in Africa series, we examine Angola, a country that has grown spectacularly since the 2002 end of its nearly 30-year civil war.

Since then, vast oil wealth has propelled this country of nearly 20 million people into breakneck economic growth that averaged more than 11 percent over the past decade. While impressive, Angola is not without problems including a corrupt, authoritarian political system that is mostly a legacy of decolonization.

As background, it should be understood that the history of modern Angola begins with decolonization in 1975 when Portugal – the last of the old European colonial powers to give up its significant overseas possessions – overthrew its own authoritarian regime the year prior, installed a democratic political system, and ended its involvement in anti-colonial wars against independence movements in its colonies. Though peace and prosperity followed for the Portuguese – who quickly integrated into an expanding European Community – a devastating civil war amongst Angola’s principal ethnic groups broke out almost immediately.

What followed was one of the true bloodbaths of Cold War geopolitics as the Soviet Union, U.S., and their respective proxies – Cuba and South Africa – vied for influence in war-torn Angola. Very quickly, two main factions emerged – the People’s Movement for the Liberation of Angola (MPLA) and the National Union for the Total Independence of Angola (UNITA).

The MPLA, a Marxist organization, quickly drew upon support from East Bloc countries associated with the Soviet Union while UNITA became the catch-all anti-communist party they drew support from the U.S. and other Western powers. More-or-less evenly matched, the MPLA – which held the capital city, Luanda, as well as most other urban centers – battled UNITA, which held most of the countryside.

In an odd twist of fate, however, it was not the anti-communist UNITA which ultimately won the conflict after the end of the Cold War. The MPLA adroitly shifted ideological leanings to approve of capitalist development – or at least investment by multinational oil firms. When the Cold War ended the West became willing to work with a more pliable regime that, conveniently, controlled the country’s oil resources.

Though UNITA, under the leadership of its charismatic leader Jonas Savimbi, battled on for nearly a decade after the superpower conflict ended, the rebel group’s war effort – now supported almost entirely through diamond mining – was unable to match the government’s oil-fueled military offensives. When Savimbi was killed by government forces in 2002 the conflict ended and reconstruction began.

In many ways, Angola’s general economic and political trajectory after the end of the civil war looks much like other such countries in Africa. Construction, especially in the capital region, is booming while oil wealth amongst those connected to the government has created a dynamic consumer economy that has a taste for all the latest Paris fashions and Silicon Valley trinkets. For those not connected with the government and the oil sector, however, the reality – like in Nigeria – is very different, with the main economic activity consisting of subsistence agriculture, avoiding landmines, negotiating the country’s wretched infrastructure, and migrating to the capital in search of work.

All this is compounded, of course, by a government that though ostensibly democratic, is definitely not free. MPLA’s long-time leader and Angola’s President – Jose Eduardo dos Santos – does not look to be stepping aside any time soon while the nation’s elections are largely illegitimate shams.

Since the adoption of a new constitution in 2010, elections for Angola’s president and vice president have been eliminated, with the new rules stating that state leadership is automatically handed over to the president of the political party winning control of the nation’s parliament. While ostensibly aping parliamentary systems in Europe, the effective lack of a viable opposition power means that Angola is effectively a one-party state run by dos Santos and his cronies in the MPLA – very much like Venezuela under the late Hugo Chavez, though with significantly less anti-capitalist rhetoric.

Still, despite this, Angola’s economy has done well. The run-up in oil prices in the last decade enriched Angola as never before and its massive petroleum reserves, estimated at anywhere from nine billion- to 13-billion barrels, has drawn interest from oil companies from around the world.

Peace and some degree of prosperity is still such a relative novelty that truly terrible political governance has not yet shaken the MPLA’s grip on power, nor is likely to in the immediate future. So long as things slowly get better and enough money is doled out from the country’s oil revenues to keep important segments of society supportive of the government in Luanda, the status quo looks set to stay in place for some time to come.

Figure 1:

Angola Economic Growth, 2003 – 2012

                Angolan GDP Growth

Ease of Doing Business

With that in mind, how do business conditions in Angola compare to the rest of the world and other countries in Africa? According to the World Bank, Angola currently ranks 163rd out of 183 countries on its Ease of Doing Business Index – a measure created by the Bank to gauge the degree to which commercial enterprises encounter regulatory hurdles, legal threats to property, and the time and money spent on things such as registering a business, ensuring right of title to property, and acquiring licenses. By way of comparison, the U.S. ranks 4th for ease of doing business, right after Singapore, Hong Kong, and New Zealand. This means that Angola is literally one of the worst places in the world in which to do business.

What does this ranking mean? Take, for instance, the Bank’s measure of how easy it is to start a business, which is depicted in Figure 2 below. The Bank defines business-creation costs as consisting of the time and money outlays involved in the series of legal steps necessary for the entrepreneur to legally establish an in-country firm. Using this framework, the bank tasks researchers to go through this process in order to establish in-country averages.

When this metric is applied to Angola, the bank finds that Angola ranks 164th out of 183 in ease of starting a business, making Angola an incredibly hard place to start a commercial enterprise. To start a business in Angola, one has to complete eight bureaucratic procedures that take a total of 68 days at a total cost of nearly $5,700, with a minimum capital of $1,000 required by the government for the start-up. Needless to say, this is a steep challenge for the average citizen of Angola to meet, where per capita income is $3,490 annually.

Figure 2:

How the World Bank Measures Ease of Starting a Business

Fig 1 Ease of Business Graphic WB

Using similar metrics for other aspects of business operations, the bank ranked Angola in a number of other areas. For ease of obtaining a construction permit, Angola ranked 128th out of 183 countries. It takes 12 procedures and 328 days at a cost of more than $24,000 – nearly seven times the per capita income – to begin construction. To obtain and register that property, another area measure by World Bank, Angola ranks 174th out of 183 countries measured. To register property in Angola takes seven bureaucratic procedures and 184 days and costs about 11.4 percent of the property’s financial value in fees.

Angola is also a relatively difficult place to obtain credit. It ranks 116th out of 183 countries. The bank examines the legal rights of creditors and borrowers in secured transactions and bankruptcy law as well as the strength of credit information bureaus and exchanges. When lenders have both strong legal rights and easy access to a wide variety of information about the client’s creditworthiness, reasons the bank, the more available credit will be. For Angola, information on borrowers is very limited while legal protections for lenders are on the weak side compared to other countries.

 

Figure 3:

How the World Banks Conceptualizes Credit Acquisition

 Fig 2 Ease of Business Graphic WB

 

Angola, however, does much better on protecting investors and minority shareholders, ranking 59th out of 183 countries. Angola ranks relatively well on holding directors liable, disclosing conflict of interests, and the ease with which minority shareholders can bring lawsuits against the corporate leadership.

Next, Angola returns to form in the area of taxation. The World Bank estimates that pleasing the tax man requires a total of 31 payments over the course of a year which takes up to 282 hours to complete and consumes up to 53.2 percent of a company’s profits. Accordingly, Angola ranks toward the global bottom on tax burden, coming in 142nd out of 183 nations.

Angola, unsurprisingly, is also an exceedingly difficult place to engage in cross-border trade. To import goods into the country one is required to have eight documents for customs officials to inspect. On average, it takes 49 days to import goods into Angola and costs $2,840 (excluding tariffs) per container shipped into the country.

The cost to export goods is relatively similar. Angola requires 11 documents to be inspected by customs officials, costing (excluding tariffs) $1,850 per container. Delivery takes up to 52 days from point of origin. Compared to global average, this is an abysmal performance netting Angola 166th places out of 183 on ease of engaging in cross-border trade.

Angola is also terrible in the area of contract enforcement, ranking 181st out of 183 countries. On average, it takes 46 legal procedures to move a contract from dispute to resolution, at the cost of $1,011 and almost three years spent in court or attending to legal issues. The financial burden of pursing a contract claim, says the bank, is also high, and typically accounts for nearly 44 percent of the value of the claim.

Finally, in terms of closing or liquidating a business, World Banks also ranks Angola near the bottom. It takes more than six years to close an estate at a cost of 22 percent of the value, for a recovery rate of 8.2 cents on the dollar. This gives Angola a ranking of 147th out of 183 countries in this area.

Table 1 presents a summary of these rankings as well as Angola’s overall ease-of-doing business rating. It shows that nearly every aspect of conducting business in Angola is either time consuming, expensive, or difficult.

Table 1:

World Bank Ease of Doing Business

Assessment and Rankings: Angola

Table 1 Angola Ease of Business

 

Prospects

That is, of course, if one follows normal procedures. Given the onerous burden legal businessmen and women face in conducting commerce, it should come as no surprise that in Angola many of these problems can be avoided with a quick bribe or payoff. All the more so, in fact, if one is carrying out business with members of the MPLA elite.

Political connections are a necessity here if one wishes to avoid being strangled by what passes for the Angolan government.

As a result, Angola ranks very low on most measure of governance quality, openness, and corruption. Transparency International ranks Angola as the 157th-most-corrupt country on Earth out of 176 total countries ranked by the non-governmental organization.

Angola also ranks very low on the Ibrahim Index of African Governance, which in 2010 gave it a score of less than 50 out of 100. Freedom House, a think tank that tracks democracy around the world, lists Angola as an “unfree” country.

Given this, it’s not surprising that only those with much to gain (multinational oil firms) or much experience working in tough governance environments (Chinese entrepreneurs and state-backed companies) have made the pilgrimage to Luanda to set up shop.

Going forward, oil – even at lower price levels than experienced in the great run-up that ended in 2008 – is all that is really keeping Angola going as a viable, coherent state.

As such, it remains extraordinarily vulnerable to oil-price swings and boom-bust commodity cycles, meaning the currency, government solvency, and political stability all depend upon the price of oil remaining at high levels.

Fortunately, unlike Nigeria, Angola’s relatively small population means there is a lot more oil cash to go around and citizen demands for welfare provision out of the state’s gargantuan oil revenues can in theory be met – or at least be seen to be met – if, that is, the MPLA is up to the job.

That, however, is an unlikely prospect. Reports suggest that the venality of the MPLA-led government is resulting in billions-of-dollars of oil revenue being siphoned off. Very little of the country’s wealth is actually making it down to the population at large.

Much like Nigeria, then, Angola has effectively become a rentier state: the country is effectively ruled via force and corruption while flawed democratic institutions provide a fig-leaf of legitimacy for those in power.

At present the system, such as it is, is working, but as the population grows and memory of civil war fades, one can expect that demands for political representation and economic inclusion could be serious, destabilizing issues in the future.

Jeffrey Cavanaugh holds a Ph.D in political science with a specialization in international relations from the University of Illinois at Urbana-Champaign. Formerly an assistant professor of political science and public administration at Mississippi State University, he writes on global affairs and international economics for AFKInsider, Mint Press News and BAM South.